First Wave of State Tax Return Changes

The Federal tax overhaul changed the landscape for many state returns as they pull for items on the federal return. NY will now allow State and Local Tax (SALT) deductions in full on the NY return even if the taxpayer takes the standard deduction on the Federal return

In addition, Alimony and Moving expenses will continue to be allowed at the state level

 

 

The Oregon Trail Leads to a Cliff –

Two recent tax related cases were decided and happened to be printed on the same newswire. One a Federal case that was on appeal and the other an Oregon state case. Both involved taxpayers claiming expenses for the use of an RV for business related activity while on the road. The Federal case made the IRS happy, the Oregon case …… well …… the OR state attorneys missed the boat or forgot to ask the IRS.

A little background is necessary before appreciating this.

First, the IRS, following tax court precedent, does not allow a taxpayer to depreciate an RV when it is also used as a residence more than 14 days. This is well established due to that fact that an RV is very difficult to partition into a home office deduction that requires exclusive use of an area of a residence for business.

Second, Oregon tax code specifically mirrors Federal tax law except where the Oregon legislature has decided to deviate. Outside of these exceptions, what the IRS does, Oregon does as well – or is supposed to.

Enter the two cases which are provided for your reading. The Federal case was decided right along the lines of the previous Federal cases addressing RV usage – in fact this one was an appeal that was upheld. Nothing grand there. However, the Oregon case went down the wrong trail. The attorney for the taxpayer in the Oregon case argued that the RV was deductible since it was a condition of employment for the taxpayer to maintain his own lodging at various jobsites. The Oregon attorney handling the case sort of took the bait and argued against the condition of employment and did not even mention (or was not aware) the Federal precedent. Well, if procuring lodging near a worksite is a condition of employment and you buy an RV to satisfy that, based on that condition alone, you have a major depreciation deduction. That is where the Internal Revenue Code adds another hurdle preventing one from deducting depreciation for a structure that passes the test of a dwelling, owned by the taxpayer, if they use it for more than 14 days, unless they can carve out exclusive business use of the dwelling from the personal use area.  Can’t do that in an RV.

The Oregon attorney didn’t even mention the Federal case, not attempted to argue the code section that supported it. Even the judge didn’t think about Federal precedent, but happily set a precedent for Oregon RV owners that want to use RVs for their lodging at worksites.

I called the attorney’s office in Oregon and they said they would probably issue a “non-acquiescence” which means they just don’t agree with the court. The case is allowed an appeal so we will wait to see. I have even provided another Federal case that decided the same 🙂

Federal Case from 2014

Oregon Case

Federal Case in Appeals

State Tax Residency Cases-Indiana Style

The title is a bit misleading and purposeful as this really doesn’t add to the body of knowledge for state tax residency rules. However, it reinforces the basis by which most states determine tax residency.

State tax residency is important as the state where an individual keeps their legal domicile is the state that has a right to tax global/worldwide income earned by the taxpayer. The more common term to describe this relationship is a Permanent Residence. This is different from the concept of a Tax Home that determines from where an individual has travel related expenses that are either deductible or that they can receive reimbursements for on tax-free basis. .

Many of our clients deal with Permanent Residence issues either because they are moving, staying too long in one state or the state wants to take an aggressive tone toward some relationship that the client has to a state.

In these 2 Indiana state tax cases, one positive for the taxpayer and the other negative, the same common benchmarks were used to determine whether the taxpayers had a domicile in Indiana. These benchmarks are common to most states:

1) Purchasing or renting residential property
2) Registering to vote
3) Seeking elective office
4) Filing a resident state income tax return or complying with the homestead laws of a state
5) Receiving public assistance
6) Titling and registering a motor vehicle (Drivers Licenses)
7) Preparing a new last will and testament which includes the state of domicile.

Item 6 is very important as you will see in the two cases that are linked below:

In the first case, entitled “negative”, the taxpayer was a physician that moved to Louisiana to take a permanent job, however, he continued to use his ex-spouses address in Indiana for license, registration and insurance purposes.  Most states treat residency similar to a flight on an airplane-when you take off, the wheels no longer touch the ground and when you land the wheels touch the ground in the new location. When one moves and changes their domicile they are expected to sever all residential ties so that their affairs no longer touch the old state. Additionally they are expected to establish ties in the new state to replace the ones that were severed in the old state. You cannot just take off, you have to land as well. Similar to this case, the taxpayer took off but never landed as he continued to maintain his Indiana residential and legal ties.

2016-indiana-residence-case-negative

In the second case that was decided for the taxpayer, a couple moved from Florida to Indiana, however the wife came first and the husband came a year later. Generally, most states expect spouses to move together which is most likely the reason that Indiana Department of Revenue expected the couple to file joint returns as residents Indiana in the wife’s first year of residence. However, in this case, the husband remained in Florida working at his full-time job and did not change his legal ties  – his driver’s license and car registration,  until he moved to Indiana. The wife was correctly judged to be a part year resident of Indiana in year one, and the husband a part year resident of Indiana beginning in year two.

2016-indiana-residence-case-positive

Take Away

One of the most common misconceptions among mobile professionals is that they are only taxed in whatever state they work. That is not the case. An individual is taxed on their worldwide income by the state in which they are domiciled-where they maintain their permanent residence. They are also taxed by the work state on income earned within their borders. However, to relieve the possibility of double taxation, the home state will generally credit the taxpayer for taxes paid to other states on the same income.

The final take away is simply the power of the state to impose tax on all income an individual earns if they continue to maintain their legal ties to that state. Simply taking another job in another state doesn’t change the equation. The ties to the old state must be severed and at the same time, ties to the new state must be established.

Yet Again, Another State Residency Case

Since we specialize in multi-state client situations, it is no surprise that we are a bit anal about residency issues. On the heels of the UT case we posted recently comes one from Arkansas that was ruled for the taxpayers despite the lingering legal ties to Arkansas.

The case involves a couple that moved from Arkansas (a state with an income tax) to Texas (a state without an income tax) in the later part of 2012. Within one year they returned to Arkansas due to pregnancy related complications requiring family support which they did not have in Texas.

Arkansas Department of Revenue ruled that the couple never really abandoned their Arkansas domicile for the following reasons:

  1. Kept Arkansas drivers licenses and even had one reprinted
  2. Maintained homestead exemption on Arkansas property
  3. Continued car registration and Voter registrations in Arkansas

As the case reads, the couple did not make a lot of effort to sever their Arkansas ties but the court took notice that

  1. The husband took a permanent position with greater responsibility in Texas
  2. Enrolled their Children in School
  3. Were reimbursed by their employer for the move to Texas
  4. Commenced their pregnancy related treatments in Texas

Generally, state revenue agencies will not relinquish the right of taxation on those who do not properly sever their ties to the old state AND establish ties in the new state. Even if that is done, an absence of only a year similar to the taxpayers case will not be sufficient to claim non-residency.  Its rare cases like this that the courts will intervene

We are posting the case for its instructive discussion. The case outlines many of the factors that Arkansas used to determine the  domicile of the taxpayers. None of which are unusual compared to other states.

When one moves to another state, care must be taken to sever ties to the old state to avoid the risk that the old state will assess tax as if the taxpayer never left

arkansas-residency-case-2016-12-12

Another State Residency Case

A recent UT tax case provides another example of how states determine residency and is of special interest to our clients who earn foreign income.

The case involves an individual that worked in a foreign country during 2012 and 2013 but still kept a drivers license, car registration and his spouse/kids  in UT. The case is instructive as it outlines the items that are evidence of continuing domicile.  Below is an excerpt from the UT tax code. Notice the reference to a drivers license (i), vehicle registration (vi), and address on tax return (ix) as proof of residency for tax purposes.

As we always advise clients, be sure that when MOVING away from a state to not only “depart” but “arrive” as well. In other words, sever the old residential ties and establish new ones. Don’t let the old drivers license and car registration linger in active status.

(Utah State Tax Commission, UT—Commission Decision, Appeal No. 15-1332,Utah,(Jun. 27, 2016)

(b) The determination of whether an individual is considered to have domicile in this state under Subsection (3)(a) shall be based on the preponderance of the evidence, taking into consideration the totality of the following facts and circumstances:
(i) whether the individual or the individual’s spouse has a driver license in this state;
(ii) whether a dependent with respect to whom the individual or the individual’s spouse claims a personal exemption on the individual’s or individual’s spouse’s federal individual income tax return is a resident student in accordance with Section 53B-8-102 who is enrolled in an institution of higher education described in Section 53B-2-101 in this state;
(iii) the nature and quality of the living accommodations that the individual or the individual’s spouse has in this state as compared to another state;
(iv) the presence in this state of a spouse or dependent with respect to whom the individual or the individual’s spouse claims a personal exemption on the individual’s or individual’s spouse’s federal individual income tax return;
(v) the physical location in which earned income as defined in Section 32(c)(2), Internal Revenue Code, is earned by the individual or the individual’s spouse;
(vi) the state of registration of a vehicle as defined in Section 59-12-102 owned or leased by the individual or the individual’s spouse;
(vii) whether the individual or the individual’s spouse is a member of a church, a club, or another similar organization in this state;
(viii) whether the individual or the individual’s spouse lists an address in this state on mail, a telephone listing, a listing in an official government publication, other correspondence, or another similar item;
(ix) whether the individual or the individual’s spouse lists an address in this state on a state or federal tax return;
(x) whether the individual or the individual’s spouse asserts residency in this state on a document, other than an individual income tax return filed under this chapter, filed with or provided to a court or other governmental entity;
(xi) the failure of an individual or the individual’s spouse to obtain a permit or license normally required of a resident of the state for which the individual or the individual’s spouse asserts to have domicile; or
(xii) whether the individual is an individual described in Subsection (1)(b).

Indiana and California drop their “reverse Credit” arrangement starting with the 2017 tax year

When one works in more than one state, both the home state and the work state will tax the income. The home state will then credit the taxpayer for the taxes paid to the work state on that income to avoid double tax on the same income.

Some border states have a reciprocity agreement where income earned in the border state is considered income earned in the home state so that only the home state will tax that income

For residents of AZ, CA, OR, IN and VA, when one lives in one of the listed states and works in the other, the credit goes in “reverse” . For example when a VA resident works in CA, the credit to relieve double taxation is allowed by CA, not the home state VA. IN and CA have dropped their reverse credit arrangement as of the 2017 tax year. For tax years 2017 and later, IN will allow a credit for taxes paid to CA against IN state tax obligations on the same income. (Note: IN and VA do not share this arrangement).

State Taxes for Strike Travelers Might Get Easier

On September 21, 2016, the U.S. House passed the Mobile Workforce State Income Tax Simplification Act of 2015, which would limit states’ authority to impose personal income taxes on nonresident employees for work performed in other states. If enacted, the bill would preclude an employee’s income earned in more than one state from being taxed in any state other than the employee’s state of residence and the state where the employee is present and performing employment duties for more than 30 days in the calendar year. The bill would also exempt employers from withholding and information reporting requirements for employees not subject to income tax under this law. The bill would allow employers to rely on the employee’s annual determination of the time expected to be spent working in a state, absent fraud or collusion.

The definition of “employee” would not include professional athletes and entertainers and prominent public figures performing for wages or other remuneration on a per-event basis.

The bill text is available at https://www.congress.gov/bill/114th-congress/house-bill/2315/text.

My comment: For most travelers this does not change the game, however those working strikes might be affected. If it passes the Senate and is signed into law I could see states like CA and NY take it to court.

One tidbit: Senator Lieberman of Connecticut introduced this bill a long time ago and it never got any traction. The purpose of the bill then was to contain border state NY from taking tax revenue from CT 🙂